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Afternoon Must-Read: Simon Wren-Lewis: The Divine Coincidence - Washington Center for Equitable Growth

Simon Wren-Lewis: The Divine Coincidence: “The Divine Coincidence is the idea that by controlling inflation… …we also bring the output gap to zero, so we do not need separate targets for both…. Imagine a parallel universe where the monetary authority targeted the output gap, and not inflation…. In this parallel universe they too had a Great Recession, and (being parallel and all) their recovery was of a very similar shape to ours. How would the output gap-targeting monetary authority in this parallel universe perceive its performance? The story would be one of complete failure. After six years of trying, the output gap had still not been closed. A huge amount of resources had been wasted as a result…. I do not think, in our inflation targeting world, the monetary authorities have this view…. They believe performance over the last six years has not been too bad…. Over the last six years, the Divine Coincidence has been distinctly unholy…. I suspect in thirty years students will look back on this period with the same disbelief that we look back on the 1930s. How could they have allowed the recession to continue for so long, they will ask, when they had the tools to do much better? Part of the answer will be inflation targeting.
#Macroeconomics #Monetary-Policy #Simon-Wren-Lewis #Inflation-Targeting #Divine-Coincidence - equitablegrowth.org